For months, investors and CEOs have waited impatiently for China to ease its Covid restrictions, which were weighing on the economy and out of sync with the rest of the world. Stock markets rallied on mere rumors of policy changes. Companies have warned that ‘zero Covid’ is hurting business.
Now that China has finally started to reverse its strict mix of mass testing, lockdowns and quarantines, its economy is entering a delicate period where it will face a set of challenges that do not perfectly match the experiences of other countries. during the pandemic.
Consumer spending is unlikely to wake up quickly after being stifled for so long, analysts say. China is facing a severe housing crisis and must rush to vaccinate more of its population, especially the elderly. Chinese factories, the engine of the country’s trade with the world, are facing weakening demand from key trading partners like the United States and Europe, both of which are eyeing possible recessions.
The roadmap for the next few months is very uncertain.
“The Chinese economy has been hampered in ways that we really don’t understand,” said Han Lin, country manager for China in Shanghai for Asia Group, a Washington-based consulting firm.
In the West, economies recovered quickly as households were released from pandemic-related restrictions. Many workers had saved their wages while working from home and had also pocketed government assistance checks. When the threat of Covid subsided, consumers went back to eating out and buying plane tickets and hotel rooms.
China’s handling of its pandemic economy has been completely different.
Ryan Lam, a 30-year-old shopkeeper in Guangzhou, took out several meals to celebrate the end of that city’s repeated lockdowns. But he returns to eating at home to save money. His goal is to set aside half of his salary.
“Private businesses have cut spending,” he said. “The pandemic is like a catalyst, compounding my concerns.”
As recently as last spring, supply disruptions caused by regional shutdowns were the main problem facing the Chinese economy. But barring some high-profile cases — including the giant Foxconn factory in Zhengzhou, which makes Apple iPhones and lost revenue due to unrest among workers fed up with lockdowns — many companies have adapted. to “zero Covid”. Supply chain bottlenecks eased as freight container rates from Shanghai to the US West Coast fell.
Understanding the protests in China
“Big companies have really gotten back to business as usual when it comes to supply chains,” said Eric Zheng, president of the American Chamber of Commerce in Shanghai. “They are more concerned with consumer sentiment – people are less willing to spend.”
Then there is the lingering specter of health crises caused by Covid. Reopening in the West tended to happen after most of the population had been vaccinated with boosters and highly effective mRNA vaccines, had caught the virus, or both. But this is not true in China.
Less than 1% of the population has been infected with Covid, according to official data. Most of the population has been vaccinated, but only with China’s national vaccines, which use older technology that has been shown to be less effective through testing in other countries. People over 80, who are most at risk, have the lowest vaccination rates.
Doctors in China predict that 80 or 90% of the country’s population could be infected in the coming weeks and months – a wave of illness that could make consumers reluctant to go out and spend money.
Many businesses have closed, leaving fewer places to spend money anyway.
Some of China’s most famous shopping streets, such as Shanghai’s Nanjing Road, are still lined with elegant plate-glass storefronts of international brands. But just steps away, many storefronts are now closed – and in a sprawling mall across the Huangpu River, long rows of stores have already closed.
Households in China also don’t have a lot of cash to spend. The United States, Hong Kong and various European governments supported consumer spending in the first two years of the pandemic by sending large checks or offering generous aid to the unemployed. This has helped many families build their savings.
Not China. Except for a few small municipal programs, which distributed coupons for local expenses, the Chinese government did not distribute additional payments to households. Beijing instead preferred to spend heavily on infrastructure construction and industrial subsidies – policies that have benefited Communist Party constituencies in local governments and state-owned enterprises.
The Chinese government pressured companies not to lay off workers. But overtime has disappeared, wiping out what is often half or more of a paycheck. And many companies have stopped hiring. Youth unemployment is nearly 20%.
Xi Jinping, China’s top leader, this week called for more economic stimulus and an accommodative monetary policy, effectively telling the central bank, the People’s Bank of China, to keep pumping money into the system. financial. This would make it easier for businesses and home buyers to borrow. But demand for business loans has been weak, while a nationwide problem of insolvent property developers and unfinished apartments has weighed on home sales.
Chinese households have two-thirds or more of their savings tied up in real estate and relatively little in the stock market – an unusual allocation by international standards and making them less likely to benefit from central bank stimulus like the made many families in the United States. .
Chinese families’ bank deposits increased somewhat during the pandemic as they spent less than usual, said Louise Loo, an economist at the Singapore office of Oxford Economics. But households have deposited much of that money in higher-interest bank accounts that restrict withdrawals for months or even years, making it difficult for families to spend more money, even if they had the confidence to do so.
Seniors’ lifestyles are also different in China. This could further limit consumer spending in the coming months.
In Western countries and even in Hong Kong, many older people live in nursing homes and other assisted living accommodation, which has limited visitation during virus outbreaks. But multigenerational living is much more common in China. The presence of an older family member, often unvaccinated, is a formidable barrier to the ability of other family members to start eating out and spending money due to the potential for infection.
“It also means we could continue to see closures in residential buildings,” Ms Loo said.
One of the hardest hit business sectors in China is travel. Hotels have been virtually empty as cities have imposed strict rules on intercity travel, forcing them to cut room rates by half or more to entice a few local residents for “stays”. Domestic air and rail travel has fallen sharply, while international air travel has been almost completely halted since March 2020.
It’s unclear when China might open its borders to international air travellers. A new policy on Wednesday to make intercity travel easier could increase spending but also spread the disease.
The Beijing municipal government has almost completely banned foreigners from visiting the city this fall. Thousands of Beijing residents who left the city for family visits or work trips also found themselves unable to return. But despite this precaution, Beijing has seen one of the biggest spikes in infections in China in recent weeks. Ending restrictions on intercity travel will allow residents of Beijing, one of China’s two wealthiest cities, along with Shanghai, to spend money elsewhere, but at the risk of spreading Covid to other cities.
The problems facing the world’s second largest economy can be seen in the experience of business owner Gong Naimin. Mr. Gong owns a small factory that makes Christmas tree decorations in Yiwu, a light manufacturing and export logistics hub four hours’ drive southwest of Shanghai. Its sales faltered as customers, facing harsh Covid restrictions, stayed away.
So he hired fewer workers. It’s a small ripple in a wave of nationwide unemployment that has hurt sales for many companies, since its employees are also customers of other companies.
With Christmas coming soon, “prime time is over,” he said. “Domestic demand is weak and it is too late to sell to foreign markets.”
Li you and Joy Dong contributed to the research.